Firms Gain Research Articles

Do Firms Gain From Managerial Overconfidence? Managerial Bargaining Power and the Role of Severance Pay

ABSTRACTWe analyze the effects of optimism and overconfidence when the manager has bargaining power and the compensation package includes severance pay. Optimism implies that the manager overestimates the probability of success, while overconfidence induces the manager to overestimate the increase in the probability of success due to her investment. If the manager can renegotiate the initial contract, the advantage of using severance pay to induce the manager to invest, commonly found in the literature, is reduced by the presence of the biases. Optimism increases severance pay and managerial entrenchement with a negative effect on expected profit. Overconfidence reduces incentive pay, as shown by the previous literature, but its effect on severance pay depends on the intensity of the bias. A moderate overconfidence reduces severance pay and increases expected profit. Conversely, extreme overconfidence increases severance pay and this may offset the beneficial effect on incentive pay. Thus, the attempt to exploit managerial overconfidence to reduce incentive pay may backfire if the manager is replaced. Our model suggests that the large severance payments documented by the empirical literature represent a form of efficient contracting when the optimistic and overconfident manager has bargaining power.

The Moderating Role of Country Governance in the Link between ESG and Financial Performance: A Study of Listed Companies in 58 Countries

Corporate environmental, social, and governance (ESG) performance is expected to positively affect financial performance because it helps firms gain sociopolitical legitimacy from receiving positive stakeholder awareness and gaining key resources. However, the research on the relationship between corporate ESG performance and financial performance has yielded mixed results. This paper explores the impact of the country governance environment on the ESG–financial performance link. We propose that the positive ESG–financial performance relationship is stronger for firms in countries with better governance. Empirical analyses using a large panel dataset covering 11 years and 58 countries support our arguments. We found that countries with more effective governance in political stability, regulatory quality, and control of corruption strengthen the positive ESG–financial performance relationship. The implications of our findings are significant for firms that face different governance environments and develop sustainable business strategies.

Patents, Freedom to Operate, and Follow-on Innovation: Evidence from Post-Grant Opposition

We study the blocking effect of patents on follow-on innovation by others. We posit that follow-on innovation requires freedom to operate (FTO), which firms typically obtain through a license from the patentee holding the original innovation. Where licensing fails, follow-on innovation is blocked unless firms gain FTO through patent invalidation. Using large-scale data from post-grant oppositions at the European Patent Office, we find that patent invalidation increases follow-on innovation, measured in citations, by 16% on average. This effect exhibits a U-shape in the value of the original innovation. For patents on low-value original innovations, invalidation predominantly increases low-value follow-on innovation outside the patentee’s product market. Here, transaction costs likely exceed the joint surplus of licensing, causing licensing failure. In contrast, for patents on high-value original innovations, invalidation mainly increases high-value follow-on innovation in the patentee’s product market. We attribute this latter result to rent dissipation, which renders patentees unwilling to license out valuable technologies to (potential) competitors. This paper was accepted by Ashish Arora, entrepreneurship and innovation. Funding: This work was supported by the Deutsche Forschungsgemeinschaft [Collaborative Research Center TRR 190]. F. Gaessler acknowledges financial support from the Spanish Agencia Estatal de Investigación through the Severo Ochoa Programme for Centres of Excellence in R&D [Barcelona School of Economics CEX2019-000915-S]. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2019.02294 .

The impact of firm's ESG performance on the skill premium: Evidence from China's green finance reform pilot zone

Firms' environmental, social, and governance (ESG) performance plays an essential role in the green finance market. It helps firms gain favor with responsible investors and reduces their financial constraints. To examine the impact of ESG performance on the skill premiums of firms in China's Green Finance Reform Pilot Zone (GFPZ), this paper uses the data of Chinese listed firms from 2015 to 2021 and constructs a difference-in-differences model. Our findings suggest that the ESG performance of firms in the pilot zone has a significant positive impact on their skill premiums, and the GFPZ policy increases firms' skill premiums by alleviating financial constraints and promoting green innovation. Furthermore, the heterogeneity analysis shows that the GFPZ policy has a more significant facilitating effect on firms in highly urbanized areas, those with low levels of digitization, and those that are non-state-owned.

FDI, Exchange Rate and Firm's Gain in Terms of Real Assets

FDI, Exchange Rate and Firm's Gain in Terms of Real Assets

Productivity Gains from Trade: Bunching Estimates from Trading Rights in China

Abstract This paper identifies productivity gains from trade by studying the manipulation behavior of firms in response to regulatory policies on international trade in China. Bunching estimates show that participation in international trade increases firm productivity. The productivity gains increase over time, indicating dynamic learning from trading. Further exploration shows no effects on R&D investment, product rationalization and markup. Young firms and nonstate-owned firms (non-SOEs) gain more from participating in trade. Workers share productivity gains through increased wages but not from increased employment.

Impact of ESG distinctiveness in alliances on shareholder value

Prior research documents that strategic alliances help firms create shareholder value by gaining access to partner’s complementary marketing and technology resources. Apart from these resources, we argue that firms can also access reputational assets of their alliance partner, based on the partner’s Environmental, Social, and Governance (ESG) performance. However, the alliance literature overlooks the effect of partner’s ESG performance on shareholder value creation. In the present study, we build on the knowledge differentials logic to propose that deviations in a firm’s ESG-specific knowledge and expertise compared to those of its alliance partner—what we term “ESG distinctiveness”—can affect a firm’s shareholder value. Using data on alliance formation announcements by public U.S. firms between 2003 and 2020, we find that firms gain value from forming alliances with high ESG performance partners. The effect of ESG distinctiveness on shareholder value due to alliance formation is stronger for firms with greater prior partnering experience.

Learning to be entrepreneurial: Do family firms gain more from female leadership than nonfamily firms?

AbstractResearch SummaryWe integrate social learning theory with gender role congruity theory to propose that family firms gain more from female leadership than nonfamily firms due to the congruence of female communal values with those of a family business. Results of our empirical study, based on a sample of 322 Spanish small‐ and medium‐sized enterprises (SMEs), show that while all three dimensions of learning orientation (commitment to learning, shared vision, and open‐mindedness) are positively related to an entrepreneurial orientation, significant differences exist based on the CEO's gender and whether the SME is a family or nonfamily firm. Strongest differences were found between female‐led family and nonfamily SMEs whereby the entrepreneurial orientation of female‐led family SMEs benefited significantly more from their firm's commitment to learning and open‐mindedness.Managerial SummaryTo cultivate entrepreneurship, a small‐ and medium‐sized enterprise (SME) leader must create an organization that fosters learning. Yet, surprisingly, we know little about male and female leaders' ability to translate their SME's learning into entrepreneurship. Our study reveals that in comparison to nonfamily firms, family firms offer an environment that is more conducive to supporting women leaders, which allows their female leaders to direct their SME's learning more effectively toward entrepreneurship. However, while female‐led family SMEs were as effective as male‐led family‐ and nonfamily‐led SMEs in directing learning toward entrepreneurship, female‐led nonfamily SMEs struggled. Our study therefore suggests that while women have an advantage leading family SMEs, gender biases hamper female leaders' ability to transform learning into greater entrepreneurial orientation in nonfamily SMEs.

Effects of time-varying political connections on loan contracts

PurposeThe authors construct two time-varying political connection (PC) indexes to measure a firm's political tendencies toward ruling and opposing parties and analyze whether a firm with ruling party tendencies obtains better bank loan contracts compared to the contracts obtained by a firm with opposing party tendencies and a firm with fixed PC tendencies.Design/methodology/approachLinguistic text mining is used to construct the two time-varying PC indexes from news sources that reflect the tone and frequencies of characteristic texts to determine a firm's tendencies to favor the ruling or opposing parties.FindingsThe results show that varying PC firms connected to the ruling party receive preferential loan contracts when their political tendencies increase but varying PC firms connected to the opposition party do not. In contrast, fixed PC firms gain similar benefits only when the connection is determined in the presidential election year but not in other years. Firms supporting two parties receive minimal financial rewards in terms of loan terms.Originality/valueIn past studies, once a firm is identified as having a connection with a political party, it is assumed to have PC throughout the sample period (i.e. fixed PC firms). The authors lift this assumption and examine how varying PC affect bank loan contracts. The two time-varying PC indexes can identify a firm's more immediate party tendencies and more precise effects of a firm's party tendencies on bank loan contracts.

Configurations for emerging market firms to achieve a high-level servitization strategy: evidence from Chinese manufacturing firms

PurposeEmerging markets face the developmental circumstances of a weak foundation in both manufacturing and services. Although servitization is viewed as an opportunity to realise industry transformation and upgrading, ways for emerging market firms to implement a high-level servitization strategy is still understudied. This study examines combinations of causal conditions for emerging market firms to implement a high level of servitization.Design/methodology/approachAnchored in the strategy tripod model, this study examines the configurations for implementing a high-level servitization strategy by using fuzzy-set qualitative comparative analysis (fsQCA) and data from the China Stock Market and Accounting Research Database (CSMAR).FindingsThe findings identify three kinds of configurations for achieving a high-level servitization strategy: market-cultivational servitization, competition-driven servitization and government-related servitization. Furthermore, the mechanisms for implementing a high-level servitization strategy differ within the regional marketization level and state-owned equity. Specifically, the improvement of the regional marketization level helps manufacturing firms realise a high level of servitization by strengthening service capacity, and state-owned equity helps firms gain distinctive legitimacy to integrate suppliers and providers into the servitization context.Research limitations/implicationsThe proposed multilevel perspective frameworks enable manufacturing firms in emerging markets to achieve a high level of servitization strategy.Originality/valueThis paper explores the impact of institutional environment, industry conditions and firm-level microfoundations on servitization, therefore providing a reference framework for emerging market firms interested in implementing high-level servitization strategies.

Effects of Subcontracting on Firms in India's Informal Manufacturing Sector: An Empirical Investigation

ABSTRACT: Subcontracting occurs when a producer outsources a part of its production. We study the effect of subcontracting from a firm with buyer power on the profits of subcontracted upstream firms, and how profits vary on the basis of location of firm and owner's gender. Subcontracting is the treatment in our study and the dependent variable is the ratio of Gross Value Added to Sales adjusted or unadjusted for wages. The decision of a firm to subcontract or not is endogenous, so we cannot use OLS regression. Since we cannot have information on a firm being treated and non-treated at the same time, we use the Average Treatment Effect on Treated (ATET) model with Nearest Neighborhood Matching (NNM) approach, in which each treated firm is matched to an untreated firm which is its nearest neighbor on other parameters, to see the effect of treatment on outcome variable on the treated group had they been not treated. We find the existence of a subcontracting premium where being in a subcontracting relationship is beneficial for the informal sector firm, though the magnitude of this premium is small, and female-headed firms gain less from subcontracting. Subcontracted male-owned firms earn a higher premium but also pay more wages out of their total revenue to labor as compared to female-owned firms, perhaps because the latter are more likely to be Own Account Manufacturing Enterprises (OAME) which do not employ hired workers. Our results show that buyer power of the subcontracting firms is offset by the benefits they provide to the subcontracted firms, possibly in the form of assured demand and payments. Thus, policies favoring the informal sector firms need to incorporate the benefits of subcontracting by exploring alternative modes of distribution with lower distribution margins, such as cooperative societies or online platforms for example Amul, MEESHO. Policies should also focus on reducing the profit margin differential between male and female owned firms by formulating a proper channel using mass media to communicate credit information and updates.

Returns to Internationalization: Business Group-Affiliated Firms vs Standalone Firms

The purpose of this study is to explore the differential gains from internationalization for different forms of corporate governance. In particular, we seek to move from the question concerning whether firms are able to generate differential gains from internationalization, to the question of why. Our focus is on ownership structure, and the differential rates at which business group affiliated firms and standalone firms gain from internationalization. Using a unique data set of some 356 standalone and business group affiliated firms, we show that while the marginal gains from internationalization may be greater for standalone firms, business group firms are better able to exploit firm-specific assets, leveraging these into higher returns to internationalization.

One, Two, Three: How Many Green Patents Start Bringing Financial Benefits for Small, Medium and Large Firms?

This paper studies the relationship between environmental innovations and firms’ financial performance from the perspective of environmental activism intensity. We explore how the number of green patents affects the financial performance of small, medium, and large firms and whether the growing number of green patents positively affects firms’ financial performance. We employed a panel data sample of 1136 green innovative and 2395 non-green innovative firms from the USA and Europe and compared their financial results. The results show that small firms benefit financially only in the second year after the first green patent implementation. Medium-sized firms enjoy improved financial performance in the first two years after the implementation of one or two green patents; however, the third green patent does not anyhow improve the financial performance. Large firms gain financial benefits every year after issuing green patents regardless of the patents’ quantity. Generally, the increase in financial performance is moderate in the first year, reaches the maximum in the second year, and becomes statistically insignificant in the third year after the last green patent’s implementation.

Frontiers: Which Firms Gain from Digital Advertising? Evidence from a Field Experiment

This paper runs a large-scale field experiment on restaurants to understand which types of businesses gain more from digital advertising.

Grand challenges, corporate legitimacy, and community integration: an integrative smart technology model

By referring to the smart city industry, this research studies how commercial firms gain legitimacy when their products aim to address grand challenges. Despite the reputation of giant technology companies and the overall legitimacy they enjoy in technology markets, exploiting opportunities in social contexts connected to grand challenges requires a societal‐oriented approach. Firms that engaged in smart cities initially approached cities with a business‐as‐usual approach, to be met with sharp criticism from local communities and pressure groups. In response, firms had to redraw their strategies to include communities in the process to stay close to local reality. This paper theorizes the process and highlights an Integrative Smart Technology Model (ISTM) to narrate how firms strategically include communities in the planning process and gain legitimacy for the technologies.

LOST IN THE ETHER: THE IMPACT OF PLATFORM HEGEMONY ON SOCIAL MEDIA MARKETING

In post-modern society, the pervasion of social media by business interests is immutable. From benign beginnings as peer-to-peer networking sites, social media has attracted the attention of commercial actors intent on exploiting the media’s propensity to reach large audiences quickly and cheaply. Organically based campaigns saw small firms gain access to large audiences on a previously unthinkable scale. However, the business model monetisation strategies of legacy platforms such as Facebook and Instagram have redefined the intrinsic role of these platforms beyond simple network carriage providers. Together with algorithmic changes designed to filter out unpaid content, a profound effect on equity of access to audiences has been felt by companies marketing via these channels. In particular, the communications efforts of small organisations with limited resources, have been substantially diminished, together with their visibility, under the user-pays regime. This paper examines the distribution of power in commercialised social media ecosystems. The research maps significant shifts in relational dynamics to reveal an increasingly dichotomous system of haves and have nots among companies operating in this environment. Using a resource and stakeholder theory lens, in-depth interviews were conducted with 17 social media marketing practitioners in the UK and Australia and analysed using a grounded theory approach. The findings reveal a form of neo-colonial gatekeeping based on increased platform hegemony. The new social media hierarchy was found to diminish diversity and perpetuate an increasingly unbalanced economic system. The research implications are discussed in the context of disenfranchised small enterprises.

The Effect of Value Creation on Startups Performance in the Digital Environment: Evidence from Chinese Digital Startups

The use of digital technology has enabled consumers to play an essential role in the success of startups. Priem et al. proposed a demand-value creation-performance framework, which argues that firms can create value for the consumer by exploring consumer demand, and this type of value-creation activity can help firms gain better performance. However, empirical evidence supporting this framework remains scarce. To address this challenge, this study empirically tests Priem et al.’s framework in the context of entrepreneurship. A unique on-site survey dataset of 323 digital startups in the digital environment was employed to explore how consumer demand drives startups to value creation activities and gain better performance. The study results show that consumer demands, in terms of demand heterogeneity, demand uncertainty, and demand interactivity, are positively related to value creation, as reflected by opportunity recognition and consumer innovation. Furthermore, both opportunity recognition and consumer innovation are positively related to the performance of startups. These findings support the demand-side perspective by providing empirical evidence for its key arguments from an entrepreneurial view and extend the demand-side perspective by contextualizing it in the increasingly digital environment.

Factors affecting organisations' supply chain agility and competitive capability

PurposeThis study examines the factors affecting organisations' agility and competitive capability in public and private sectors. Drawn from the literature on supply chain agility (SC agility), the factors of supply chain speed, visibility, flexibility, innovation and leadership are tested for further understanding.Design/methodology/approachThrough purposive sampling, a sample of 261 responses was collected using a structured questionnaire. The participants were identified as supply chain practitioners from different industries of the United Arab Emirates (UAE). Data were analysed using partial least square-structural equation modelling (PLS-SEM).FindingsFirms can improve the agility of their supply chains by developing strong supply chain leadership and flexibility, increasing the speed and visibility of the supply chain, and through innovation in supply chain operations. Additionally, competitive capabilities can also be enhanced through SC agility.Originality/valueThis study explores organisations' agility and competitive capability in public and private sectors of the UAE. The findings offer numerous practical insights into the UAE's business context and will help firms gain better competitive advantages through agile supply chain operations.

Which Firms Gain from Digital Advertising? Evidence from a Field Experiment

Which Firms Gain from Digital Advertising? Evidence from a Field Experiment

Moderating Role of Financial Performance on The Relationship Between Board Attributes and Corporate Sustainability Disclosure Compliance

The concept of financial performance is of great concern to stakeholders. This empirical paper investigates the moderating role of financial performance on the link between board attributes and corporate sustainability disclosure compliance (CSDC). The going concern of a company depends on its ability to generate returns from operating, investing, and financing activities. Thus, it is crucially important to explore the extent to which a firm's financial performance strengthens the influence of firm-level determinants of CSDC. The sample for the current study consists of 118 Nigerian-listed companies over seven years between 2011 and 2017. The dynamic GMM regression analysis is used for data analysis. The GMM results reveal the moderating effect of return on assets and return on equity on the influence of firm and board attributes on CSDC, evident from significant positive interaction with board size, board independence, gender diversity and audit committee. This implies that when firms gain financial strength to engage in more sustainable activities, this increases the level of corporate sustainability disclosure compliance.